Tuesday, July 19, 2005

Millions of investors who bought dividend-paying stocks after President Bush persuaded Congress to lower the taxes on investments to 15 percent are paying a lot more, in some cases almost 50 percent more, two new analyses show.

The cause is the alternative minimum tax, a parallel income tax that was originally aimed at the richest taxpayers but is affecting an increasing number of Americans and denying them at least part of the Bush administration's tax cuts.

Until 2003, dividends were taxed at the same rates as wages, as high as 35 percent for some taxpayers. But the alternative minimum tax can subject taxpayers who make less than $382,000 (roughly the threshold for the top 1 percent income class) to an effective tax rate on dividends and capital gains of 22 percent. The higher rate can affect some taxpayers making as little as $75,000.

John Buckley, the chief tax lawyer for Democrats on the House Ways and Means Committee, argued in an article published yesterday in Tax Notes, a weekly nonprofit journal of tax policy, that this denial of promised tax relief was not a mistake, but part of a calculated Republican strategy dating back to at least 1996. The article is also posted at www .taxanalysts.com. "The use of the A.M.T. to reduce the cost of recent tax cuts clearly is the most consequential of the many budget gimmicks we have seen in recent years," Mr. Buckley, who opposes most of Mr. Bush's tax policies, wrote.

"The 1997, 2001 and 2003 tax cuts are remarkably similar in one respect," he wrote. "They used the A.M.T. to limit the benefits provided to middle-income and moderately wealthy taxpayers to provide the greatest benefits to the very wealthy."